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June 24 (The following statement was released by the rating agency)
Fitch Ratings has today revised the Outlook on CS Energy Limited's (CS Energy) Long-term foreign currency Issuer Default Rating (IDR) to Negative from Stable. The agency has simultaneously affirmed CS Energy's Long-Term and Short-Term IDRs at 'AA' and 'F1+' respectively.
KEY RATING DRIVERS
Outlook Revision: The revision in Outlook to Negative from Stable follows the inclusion of proceeds from sales of state-owned generation companies in Queensland, including CS Energy, in the state budget in June 2014, increasing the possibility of privatisation of these entities. The rating of CS Energy is currently closely linked to the ratings of the state of Queensland.
Weakening Linkages with State: The Outlook revision reflects a weakening in the strategic linkages between the State of Queensland (QLD, 'AA'/Stable) and the company, should the entity be privatised, as viewed under Fitch's parent-subsidiary rating methodology. The proposed timing of this transaction is, however, only likely after the next state election due in mid-2015, given the state government's commitment to seek a public mandate through the state election. A sale of the assets can lead to a material weakening of the rating linkages with the state leading to a multiple-notch downgrade of CS Energy's ratings to a level consistent with its stand-alone credit profile.
Integrated with the State: Queensland Treasury Corporation (QTC, 'AA'/Stable), the state borrowing authority, provides CS Energy with long-term funding and short-term liquidity. The state also effectively controls the appointment of CS Energy's board, and its capex and cash distribution policies.
Standalone Credit Profile: CSE's standalone credit profile reflects its merchant generation business and consequent exposure to wholesale pool prices. Financial performance for the financial year to end-June 2013 (FY13) continues to be affected by weak electricity demand growth, surplus generation capacity in Queensland and lower than targeted generation output from disruption in availability of coal supplies. CSE also incurred sizeable emission costs in FY13, which were higher than it was able to recover from the market.
Higher Future Plant Utilisation: CSE's generation mix comprises predominantly of coal-fired generation. Higher domestic gas prices and lower emissions-related costs, expected under the new Federal government policy, enhance the considerable cost advantage of coal-fired generation over competing gas-fired generation. CSE's financial performance in future will benefit from higher coal-fired generation plant utilisation as well as from a repeal of current emissions legislation.
CS Energy is a Queensland state-owned power generator, with a trading generation capacity of 4,035 megawatts across four sites, from a mixture of coal-fired and pumped storage hydro power generation.
Positive: Considered unlikely given the likely announcement of sale/lease of these assets at the next state election
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-Downgrade in Queensland's ratings
-Sale of the company will likely result in a multi-notch downgrade
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